January 30, 2006

Our Growing Income Inequality

By Mimikatz

On the eve of President Bush’s 6th State of the Union message, three new reports from the Center for Budget Policies and Priorities show just where we are—and where we are heading—as a nation, and if you aren’t in at least the top 20%, if not the top 5%, it isn’t pretty.First, new data from the Congressional Budget Office demonstate that income inequality is not only at historically high levels, the disparities are accelerating under President Bush.Second, the reasons for this are not hard to find.The CBO also has data showing that capital income has become increasingly concentrated among the very rich and the very, very rich, partly as a result of the Bush tax cuts.Finally, a third report shows state by state how the highest income groups have recovered quite nicely from the stock market drop of 2000-2001, while middle and lower income earners have not recovered from the associated recession, and—at least in states with enough wealthy to measure—the incomes of the top fifth have risen the most.So while President Bush in the State of the Union Speech will tout his “Ownership Society” and boast that more Americans than ever own stocks, the fact is that the share of capital income received by the bottom 80% of the population dropped from 23.5% in 1989 to 12.6% in 2003, while the share the top 1% got rose to an unprecendented 57.7%.And it is going to get worse.

The Growth In Long-Term Income Inequality

Income inequality among US households has been growing since 1979. (For the most graphic presentation of what disparities in income really mean, consult the "L-Curve", an interactive site, which represents income as stacks of hundred dollar bills the length of a football field. On the one yard line an average family earns a stack less than half an inch high. At the other end, Bill Gates once earned a stack extending beyond the stratosphere.) As the first CBPP Report shows, while the bottom fifth saw their average after-tax income rise only 4% since 1979 and the middle fifth gained an average of 15%, the top 1% of households saw their incomes rise by a whopping 129% between 1979 and 2003, more than doubling, when measured in constant dollars.This means that while the average income of the lowest fifth of households rose by only $600 in 24 years (a generation), to $14,100, the middle fifth saw incomes increase by 15%, to $44,900 in 2003.Meanwhile the average after-tax income of the top one percent of households rose by $395,700 to $701,500 in 2003 dollars.

Because it takes money to make money, the richest 1% of households also saw their share of national wealth jump from7.5% in 1979 to 12.2 % in 2003.The shares of the lowest three fifths all fell, by contrast.The shares of the top group increased from about 1997 on, then paused after the stock market drop in2000-2002.Then the top share began to rise again.The top 1% saw their after-tax income rise 8.2% in 2003, while incomes grew by 3.9% for the top fifth as a whole.Meanwhile, the fourth fifth gained 1.6%, the next two quintiles less than 1%, and the bottom fifth actually lost 1.4% in income in 2003.The top five percent continued to gain in 2004, apparently alone of all income groups, according to census data.

Why has this happened? It would seem to be a combination of politics and economics. A primary recent factor isthe increased share of the economic recovery that goes to corporate profits and compensation for top management, as opposed to workers.According to the CBPP,

"Income inequality increased rapidly during the 1980s. During the 1990s exceptionally low unemployment produced relatively broad-based wage growth during the latter part of the decade. This broad-based growth ended with the 2001 economic downturn. Growth in real wages for low- and moderate-income families began to slow and by 2003 wages began to decline. Thus far, the recovery from the downturn has not been strong enough to generate the kind of income gains among low- and middle-income families seen in the late 1990s."

In addition, Bush's tax policies, which direct most tax breaks to the wealthy and shift taxes onto the middle class, have exacerbated these trends.Moreover, two new tax breaks that quietly took effect on January 1 of this year give97% of their benefits to people with incomes over $200,000.The budget reconciliation measures to be voted on by the House on Thursday will increase this trend by cutting such things as student aid for low and middle income households, while more tax breaks for the wealthy are in the offing this Spring.

Capital Income Is Becoming More ConcentratedNot only are incomes becoming increasingly unequal, but the share of capital income is becoming more concentratedat the top.Recent data from the Congressional Budget Office show that the top 1% of received 57.5% of all capital income (income from interest, dividents, rents and capital gains).This is an increase of 22% since 1980, when they got only about 35.6% of capital income.While President Bush touts his “Ownership Society” and boasts that more Americans than ever own stocks, the fact is that the share of capital income held by the bottom 80% of the population dropped from 23.5% in 1989 to 12.6% in 2003.(The remaining 29.9% was shared by the rest of the top quintile, most of it going to the top 5%.)

Dividends and capital gains are taxed at a maximum rate of 15% (the same rate paid by those with taxable incomes in the $7,300-29,700 range for singles, or $14,600-59,400 for couples),as opposed to a top rate of 35% on income over $326,450.Thus, extending the preferential rate for dividends and capital gains, as Congress proposes to do, will again disproportionately benefit the very wealthy, who would otherwise pay the top rates on capital income, leading to ever more income inequality.Moreover, because taxes are falling on those whose incomes are rising, and staying the same or even increasing for those whose share of national income is falling, the budget deficit cannot help but widen as tax receipts continue to exceed government spending.

Income Inequality Varies By State

The third CBPP report (map included) shows the breakdown of income inequality state by state.The largest disparities are in New York and Texas, where the upper 20% as a group makes more than 8 times what the bottom fifth makes as a group, then Tennessee, Arizona, Florida and California.Income inequality is least in the upper Mountain and Plains states, as well as parts of New England.With higher minimum wages, and tax and safety net policies that assist the lower half, states can mitigate the trend of growing inequality.

As with global warming and so many other problems, President Bush and the GOP-controlled Congress are actively supporting these trends, while seeming to be oblivious to their potential consequences, whether fiscal, sociological or electoral.For a generation Americans have accepted this growing inequality with disturbing passivity.Whether that can continue even as income inequality accelerates is anyone’s guess.

Comments

Great post mimikatz. Thanks for this.

I was thinking about it tonight when I read this piece that the former chairman of the Public Company Accounting Oversight Board, who in 2004 said that the level of compensation of CEOs is "grotesquely immoral" is now a vice chairman of Merrill Lynch, where the CEO is one of those who takes his grotesque immorality all the way to the bank.

Also this accompanying piece by Ben Stein (of all people) in which he essentially calls the executives at United Airlines murderers for robbing their employees of their pensions and their holdings in the company.

Not to mention this piece on the CEO of Nike, who just left the company after only 13 months with a $14 million severance. He was asked why he was paid so much. He says he deserved it: "And needless to say the year at Nike, while it had its ups, had many days of frustration accompanied by sleepless nights."

For a generation Americans have accepted this growing inequality with disturbing passivity. Whether that can continue even as income inequality accelerates is anyone’s guess.

I hate to be cynical - I really do hate it - but I can't escape the conclusion that leaders in our current government know full well that our current economic arrangement is unsustainable, and they want to make sure their buddies cash in before it the inevitable happens. George Bush went to China recently with the traditional list of Chinese political prisoners, and for the first time in memory, none were released, not one. China's our banker now, or one of them. We're borrowing $2 billon a DAY. I would love to be wrong, but I fear that we're seeing just the beginning of income inequality in this country. Now, at least, we still have more than three or so classes.

The biggest driver is the "free money" propaganda campaign that the Republicans have used for last 25 years. No need to cut services; just cut taxes. Miracles will happen.

Yeah, right. But it has worked at the polls.

That has been the main driver.

Whatever Dem spine there might have been to oppose gwb tax giveaway in 2001 was undercut by Greenspan, partisan hack.

And, among the Repub central strategists, there a few like Rove. Well, maybe just Rove. Somwhere I read that he is obsessed with positioning US to "compete with China" economically, and he sees it necessary to reduce labor power to rough equivalent of Chinese labor. I read this in context of Social Security reform.

I do not believe most, or even many, Republicans think this way. And maybe Rove has been libeled.

I'm with jonnybutter. They're squeezing what they can out before it all collapses, so that once it does collapse, they'll be able to pay for their personal armies to protect their huge gated estates. Neo-fuedalism, that's where they want to take us, to a time when the very wealthy could dress up in facy suits and claim to be protecting the glory of their god so they could go plunder less-well-armed peoples.

I also keep thinking about when I showed La hora des los hornos and my fat and happy middle class students were complaining about how strident the movie is. "Well I can understand if I were Argentine and just one percent of the population owned forty percent of the wealth, I'd be really pissed too." I made the big mistake of telling them we were basically Argentina. Should have made them all look up the data themselves for better effect.

We're a RICH Argentina for the moment, which is different. I hate to be all doomsday-y, but we have ceded our economic independence in many ways, and it's just a matter of time before we have to pay the price, whatever that will be. I know it's in other country's interests to keep the goods (and financing) flowing into the US and money flowing out, but it can't go on forever.

It was Hitchens who said, refering to the 2k election result, that the US was becoming a Banana Republic. When he's right he's right, for whatever reason.

I was stunned to find that in 24 years, a whole generation, the average income of people in the bottom 20% had increased only $600 in constant dollars. For the next quintile it has gone up $3500 (less than $150 a year) to $30,800. The median household income has gone all the way to $37,800. Maybe people feel ok because the price of consumer electronics has gone down so much and what is available has gone up so much. And car prices have been relatively stable for the past 10 years.

Where the crunch really comes, though, is housing. So few young people can afford apartments when they start out, let alone houses. We were able to be really independent at a much younger age because of lower education and housing costs.

Yeah, we're a rich Argentina, but remember, Argentina has been a rich Argentina in the past, too. Top 6 economies in teh world, at one point. Problem is, when your economy is dependent on one sector (Ag), and you switch bankers from a country that doesn't compete in that sector (England) to a country that does compete (the US) then you're pretty much doomed.

Our former bankers? The Saudis, who needed our weapons and educated workers and so forth. Our current bankers? Well, the Chinese can compete with us on sheer numbers of educated workers, that's for sure.

Oh yes, EW. I wasn't being sanguine. I was just thinking about how some students might react, ie 'Gee, we're not like Argentina! That's gloom n' doom liberal talk! Look at all the stuff we can buy!'.

Absolutely, mimikatz, cheaper electronics (more and more from China now, so, in effect, partially subsidized), stable car prices, subsidized food, effectively subsidized cheap clothing, etc. makes a difference. But prices for that stuff can go only so low. And of course prices for other things are going up. See, if we'd had HSAs a generation ago, the bottom quintile could've saved that $600 tax free!

About housing, I think lots of younger people and less than wealthy people are 'house poor' - own more dwelling than they can afford. Of course you're right that housing and education costs have gone up (and that it's therefore definitely harder to start out now) but home ownership has done too, no? Maybe we'll all move to the Great Plains and Pittsburgh...

There is hope for our US economy, we just need to stop trying to be competitive in the manufacturing department and focus on what we are good at- R&R...this is the proven path and it is what makes the US great!